China’s Foreign Exchange Reserves Fuels Inflation And Adds To Upwards Pressure On Chinese Yuan

China has a problem. The country simply has more money than it knows what to do with. And I don’t mean that in the Zimbabwean sense either.

China’s mighty export machine has sucked-in so much money that the country now has $1.81 thousand billion in foreign exchange reserves.

That may sound like pure manna from heaven. But it’s actually creating a headache for the Chinese government. All that extra cash in the country has fuelled inflation. And it’s added to the upwards pressure on the Chinese yuan.

So the Chinese government is encouraging domestic companies to invest abroad. That helps get excess capital out of its domestic financial system.

Chinese companies invested $25.7 billion abroad in just the first six months of this year.

But this is just the beginning of a colossal tide of international investment from the Middle Kingdom.

Positioning your portfolio to capture part of that could be one of the smartest investment moves you ever make.

The trickle becomes a flood

Let’s just look at the figures. Chinese companies invested $25.7 billion abroad in the first half of 2008. That’s more than triple the figure from a year earlier. And it’s already well above what the $18.7 billion they invested outside the country in 2007. That, again was up 6.3% from a year earlier.

But even those figures don’t really tell the whole picture. Because they don’t include spending by financial institutions. Add in the billions that the Chinese have invested in floundering Western banks, and the figure is a lot higher. China still receives a lot more international investment than it makes. It received $52.4 billion in FDI in the first half of this year. That’s 46% higher than a year earlier.

The sheer scale of money flowing into China is mind-boggling. And it practically guarantees that the tide of outward investment is going to keep rising.

The big winners will be countries that have the resources that China needs. And which are open to China’s style of investment.

China’s economic development model doesn’t just involve buying the commodities that it needs to supply its industries on the open market. Instead they’ve been trying to lock-up guaranteed supplies of resources by actually buying production facilities.

This month, China's second-largest iron ore trader, Sinosteel Corp., spent A$1.36 billion to take control of Australian mining company, Midwest Corp.

The Africans have been the most open to this. And they have already received well over $30 billion in Chinese investment. Profit Hunter readers are already positioned to profit from that.

The Chinese are building thousands of miles new roads and railways in the Congo as part of a deal that gives them access to Congo’s copper and cobalt mines. The transport network is vital for China to extract those resources economically.

We’re invested in a mining company that operates in the same region. Our company is set to get a piggy-back ride on China’s infrastructure investment. It’s transport costs are going to fall dramatically. Fantastic news for its bottom line…

We’re also positioned to benefit as China invests heavily in oil-rich Angola and Equatorial Guinea. We are invested in a small AIM-listed company that owns vital infrastructure in both these countries. In fact, its hard to imagine the Chinese getting the sort of return that they are looking for without relying on this company. We got in early on this opportunity, but I still think it makes a fantastic investment. You can read all about it here.

We’re all familiar with China’s economic miracle by now. But it’s been largely focussed on the country itself: domestic manufacturing and export of goods.

China’s latest major export is capital. And you can bet it won’t be long before it starts to have the same impact on international investment that it has already had on global trade.

Here at Profit Hunter, we are looking for new ways to track this growing tide of money. Because positioning yourself in the industries that China is going to buy into in the years ahead is one of the surest investment strategies that I can think of.

Regards,

Manraaj Singh
Editor
Profit Hunter P.S. If you enjoyed this article then we encourage you to sign up for Profit Hunter. Track down exciting opportunities in the worlds’ emerging markets and always stay ahead of the curve.

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China’s Foreign Exchange Reserves Fuels Inflation And Adds To Upwards Pressure On Chinese Yuan

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